Accounting Conventions

Consistency

Consistency convention requires accountants to use the accounting procedures or practices in a way that enables comparability in the accounting formation from one period to another.

Consistency focus on the comparability of financial information. It allows users to compare the information in the financial statements from one period to another.

If there is an inconsistency from one period to another due to the change of the accounting procedures, the company needs to disclosure in the note to financial statements explaining clearly why the change is made.

Full-disclosure

Full-disclosure focus on the transparency that the company provides in their financial statements so that they do not mislead the users.

Full-disclosure convention requires the company to disclose all the information that is relevant to the users’ understanding of the financial statements.

That’s why there is a note to financial statements, in which it discloses a lot of important information including accounting procedures used in preparing the financial statements, change in accounting procedures and significant events arising after the balance sheet date, etc.

Materiality

Materiality refers to the matter that is significant or important. In this case, a matter is important if it can influence the economic decision making of the users of financial statements. Materiality is usually determined by the dollar value relating to an item in the financial statements.

However, the nature of such item also decides whether it is materiality or not too. For example, a $1,000 misstatement may be very small for a million dollars company. But if the misstatement is due to fraud, thief or bribery, it is important; therefore, it’s material. 

Conservatism

Conservatism refers to being prudential when dealing with uncertainty and estimate. It is a principle that requires accountants to be cautious when preparing financial statements.

Conservation convention is an approach that assumes the worst-case scenario, in which assets and revenues tend to be understated while liabilities and expenses tend to be overstated. In the conservatism approach, net income should never be overestimated and provisioning for losses should always be made.

In this case, when the company needs to choose between two reasonable solutions in accounting procedures or estimates, they should choose the one that is least likely to result in an overstatement of assets or net income.

Cost-benefit

Cost-benefit refers to the accounting practice that weighs the benefit against the cost of providing accounting information. In this accounting convention, accounting information should only be provided if the benefit outweighs the cost.

However, the company should always maintain the minimum acceptable level of relevance and reliability which is required by applicable accounting standards such as US GAAP or IFRS. This is so that accounting information could be understandable.

An example of cost-benefit is that many companies today tend to provide only a summary of financial information in their annual report. This is because the costly financial reports with detail notes tend to overwhelm the external users of financial statements in which they usually provide little benefit. (Though, the detailed reports are still required to submit to related regulatory bodies and government agencies.)